A recent blackout in Venezuela disrupted operations at PDVSA’s 940,000 barrel-per-day refining complex, threatening to exacerbate fuel shortages that have already become commonplace in the country.
The incident came after Venezuela saw several months of relatively stable oil production. While the outage is likely only temporary, another threat to Venezuela’s oil sector looms in just a few weeks. The U.S. government has been unable to dislodge President Nicolas Maduro from power, but could take another dramatic escalatory measure intended to knock oil supply offline.
Venezuela’s oil sector stabilized, but more threats loom
The U.S.-backed campaign to topple President Maduro began in January. Opposition leader Juan Guaidó was the public face of the effort, but American sanctions on PDVSA and Venezuela’s oil exports were the screws that rapidly ratcheted up the pressure on Caracas. Venezuela’s oil production was already in decline, but plunged by 142,000 barrels per day (b/d) in February, and 289,000 b/d in March, as sanctions scared away buyers from around the world. Venezuelan production averaged 1.354 million barrels per day (Mb/d) in 2018, but that figured cratered to just 732,000 b/d in March of this year.
However, output has held up surprisingly well since then, stabilizing at lower post-sanctions levels. According to S&P Global Platts, Venezuela’s production stood at about 760,000 b/d in June, which was actually up from several months earlier.
The stabilization of the country’s oil output came as the effort to overthrow Maduro has run aground. The urgency around the political crisis has receded, at least from the vantage point of Washington. Negotiations even began between delegates of Maduro and Guaidó, hosted by Norway, although to little effect.
Renewed trouble hit Venezuela in July. An electricity blackout on July 7 knocked out operations at the 635,000-b/d Amuay and the 305,000-bpd Cardon refineries. The two refineries account for over 70 percent of Venezuela’s refining capacity. The facilities were expected to come back online as soon as July 10, but lingering damage to power plants and to the refineries could hamper a full comeback.
The Trump administration faces an important decision later this month, one that could either maintain the status quo, or one that could escalate the “maximum pressure” campaign on Caracas.
More significantly, the Trump administration faces an important decision later this month, one that could either maintain the status quo, or one that could escalate the “maximum pressure” campaign on Caracas.
In January, the U.S. government tightened sanctions on Venezuela, but issued a series of waivers to oil companies operating in joint ventures with PDVSA in Venezuela. The logic, in addition to shielding American companies from sanctions, was to keep the oil sector alive long enough that it could provide an economic foundation for the new government under Juan Guaidó.
But the regime change effort has clearly stalled. The waivers expire later this month, and the U.S. government is considering letting them expire as a way to force some of the companies out in order to further tighten the fiscal noose around the Venezuelan government. That could affect operations for Chevron, Halliburton, Schlumberger, Baker Hughes and Weatherford International, according to S&P Global Platts. If the Trump administration followed through, the companies would have 60 to 90 days to wind down their operations, S&P reported.
Chevron, in particular, plays a crucial role in keeping Venezuela’s oil sector running, such as it is. The American oil major is active in four joint ventures with PDVSA, and its share of production accounts for 42,000 b/d, although total output from the four sites exceeds 200,000 b/d. The exit of Chevron and other international companies would be especially painful for Maduro’s regime because the joint ventures have proven to be much more resilient than PDVSA’s sole operations. Foreign companies bring capital and technical expertise, and when the industry really began to deteriorate in 2017 and 2018, output from the joint ventures held up better than production from projects run only by PDVSA.
The upshot is that if the U.S. lets the waivers expire in late July, Venezuela’s oil production could resume its downward slide, ending a several-month hiatus that saw output stabilize. “The service companies leaving will have some additional effect since they are involved in the operation of at least a third of the rigs in activity,” Francisco Monaldi, a fellow at Rice University’s Baker Institute, told S&P Global Platts. “The negative effects of them leaving would be gradual but persistent.”
That would serve the goals of the Trump administration, which believes that it can force Maduro from power by choking off oil revenues. However, the U.S. government is also wary of allowing oil companies from China and Russia to step into the void.
To be sure, Russia and China have paid a heavy price by throwing good money after bad in Venezuela. But even as the losses piled up, Russia in particular has stuck with Maduro. “From the very beginning it was a purely political project. We all had to contribute,” an executive at a Russian oil firm that partnered with Rosneft in Venezuela told Reuters earlier this year.
The prospect of greater influence for Moscow and Beijing in Venezuela might be enough for the Trump administration to extend the waivers to Chevron.
The prospect of greater influence for Moscow and Beijing in Venezuela might be enough for the Trump administration to extend the waivers to Chevron. “If Western producers leave, the Chinese and the Russians will dominate the largest oil reserves on the planet,” Raul Gallegos, an associate director at consulting company Control Risks, told Bloomberg. “Does Trump want to do that? I don’t think so.”
The tradeoff is hardly theoretical. In perhaps an attempt to clarify what is at stake, an unnamed official in the Venezuelan presidential palace told Argus Media that if the Trump administration lets the waivers expire, Maduro’s government would seize Chevron’s assets and “offer Russian, Chinese and other non-US oil companies an ‘opportunity to acquire’ them,” Argus reported. In fact, the official said that “discreet discussions” have already started with Rosneft and CNPC.
It’s unclear how the Trump administration will approach what appears to be competing geostrategic goals, but Venezuela’s oil sector hangs in the balance.